CAPITAL LEASE
Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, if it meets any one of the following criteria: (a) the lessor transfers ownership to the lessee at the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or (d) the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor. (Also see finance lease.)

DIRECT FINANCING LEASE (Direct Lease) A non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.

ECONOMIC LIFE (Useful Life)
The period of time during which an asset will have economic value and be usable.

EFFECTIVE LEASE RATE
The effective rate (to the lessee) of cash flows resulting from a lease transaction. To compare this rate with a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities.

EQUIPMENT SCHEDULE
A document that describes in detail the equipment being leased. It may also state the lease term, commencement date, repayment schedule and location of the equipment.

FAIR MARKET PURCHASE OPTION
An option to purchase leased property at the end of the lease term at its then fair market value. The lessor does not have the ability to retain title to the equipment if the lessee chooses to exercise the purchase option.

FINANCE LEASE
Typically, a finance lease is a full-payout, noncancellable agreement, in which the lessee is responsible for maintenance, taxes, and insurance.

LEASE
A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate.

LESSEE
The user of the equipment being leased.

LESSOR
The party to a lease agreement who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term, and is entitled to the rentals.

LEVERAGED LEASE
In this type of lease, the lessor provides an equity portion (usually 20 to 40 percent) of the equipment cost and lenders provide the balance on a nonrecourse debt basis. The lessor receives the tax benefits of ownership.

MASTER LEASE
A contract where the lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions without negotiating a new contract.

NET LEASE
A lease wherein rental payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.

NONRECOURSE LOAN
In a leveraged lease, the lenders cannot look to the lessor for repayment. The lender's only recourse is to the lessee and, therefore, the lessee's credit rating is of prime importance.

OPEN-END LEASE
A conditional sale lease in which the lessee guarantees that the lessor will realize a minimum value from the sale of the asset at the end of the lease.

OPERATING LEASE
Any lease that is not a capital lease. These are generally used for short term leases of equipment. The lessee can acquire the use of equipment for just a fraction of the useful life of the asset. Additional services such as maintenance and insurance may be provided by the lessor.

PURCHASE OPTION
A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at a specified amount or at fair market value.

RESIDUAL VALUE
The value of an asset at the conclusion of a lease.